Bank stocks continued their fall Thursday toward six-month lows as the gains posted Wednesday, when the Federal Reserve voted not to raise interest rates, proved short-lived.
Data showing a drop in home construction and a rise in the nation's unemployment rate had given some support to the notion that the economy is easing off its torrid first-quarter growth pace. But the Fed's comments on Wednesday made clear that it is looking for much more evidence that the economy is slowing to a degree that would head off inflation. Sales of new single-family homes fell in May to their lowest level in eight months. New-home sales fell 0.2% last month, to a seasonally adjusted annual rate of 875,000 units, from April's revised pace of 877,000, the Commerce Department said Thursday.
The market, however, continues to be concerned, said Scott J. Brown, chief economist at Raymond James & Associates of St. Petersburg, Fla.
"There is some speculation that the slowing in the economy is not a true slowing down," Mr. Brown said. "The economy had an incredible run in the first half of the year, and this could just be a pause in that. It is important that people should be skeptical. The Fed gave that impression in its statement anyway."
Gerald Cronin, a bank analyst at McDonald Investments of Cleveland, agreed with that assessment. "The Fed really did not give people what they were looking for," he said. "The market needs more long-term direction."
The Federal Open Market Committee kept interest rates steady at its Wednesday meeting after having imposed an increase of 50 basis points at its May meeting but said it remained concerned that the pace of the economy still could produce inflation. "Signs that growth in demand is moving to a sustainable pace are still tentative and preliminary," policymakers said in a statement.
The American Banker index of the 50 largest banks fell 1.72%, and its index of 225 banks fell 2.17%.
Many banking companies continued to drift slightly above their six-month lows. First Union Corp. of Charlotte, N.C., actually hit its 52-week low.
The biggest losers of the day included First Union, $1.2109, or 4.50%, to $25.6875; J.P. Morgan & Co., $4.2226, or 3.62%, to $112.50; and FleetBoston Financial Corp, $1.4687, or 3.97%, to $35.5625.
Economic news is expected to take a back seat in investor thinking next week to second-quarter earnings and news from the National Credit Review, the Office of the Comptroller of the Currency's review of banks' loan portfolios.
Few expect bank stocks to show much luster given widespread views that second-quarter earnings are likely to be subpar, and some banks continue to have trouble with their net interest margins and loan portfolios.
Wachovia Corp. of Winston-Salem, N.C., and Unionbancal of San Francisco have already said their second-quarter earnings would fall short of expectations because of problem loans, and Bank of America Corp. shares have also suffered from worries over credit quality.